Output Gap Calculator
From actual and potential GDP, compute the output gap: (actual − potential) ÷ potential × 100%, measuring how far output is above or below capacity.
Input Data
Results
At a glance:The output gap (GDP gap) measures the percentage difference between actual GDP and potential GDP: (actual − potential) ÷ potential × 100%. Potential GDP is the maximum sustainable output at full employment without accelerating inflation; actual GDP is current output. Sign shows the cycle position: a negative gap (actual < potential, recession gap) means slack, idle capacity, high unemployment, weak inflation — room to stimulate; a positive gap (actual > potential, inflation gap) means overheating, tight resources, rising inflation — may need tightening. It is a core temperature gauge for policy, linked to Okun's Law.
Formula
Output gap = (actual GDP − potential GDP) ÷ potential GDP × 100%.
Negative gap: slack; positive gap: overheating.
$$\text{Output Gap} = \dfrac{\text{Actual GDP} - \text{Potential GDP}}{\text{Potential GDP}} \times 100\%$$How to Use
- Enter actual GDP (current output).
- Enter potential GDP (max at full employment).
- View the gap (positive = hot, negative = cool).
Output gap examples (HK$100M)
| Scenario | Actual GDP | Potential GDP | Gap | Meaning |
|---|---|---|---|---|
| Recession gap | 9,500 | 10,000 | −5.00% | Slack, high unemployment, low inflation |
| Overheating | 10,300 | 10,000 | +3.00% | Tight resources, inflation pressure |
| Balanced | 10,000 | 10,000 | 0.00% | Near full employment, stable prices |
Negative gap (actual < potential) leaves room to stimulate; positive gap (actual > potential) may need tightening to curb inflation.
Case Studies
Case 1: A recession gap
Potential GDP (sustainable at full employment) estimated at 10,000; actual GDP only 9,500.
Gap = (9,500 − 10,000) ÷ 10,000 × 100% = −5%.
A −5% gap means output is 5% below capacity — recession gap: idle resources, unemployment above natural, low inflation. The central bank and government usually have room for easier money or expansionary fiscal to lift output back to potential.
Case 2: A positive gap and overheating
Same economy: actual GDP rises to 10,300, potential still 10,000 → gap = (10,300 − 10,000) ÷ 10,000 × 100% = +3%.
A +3% gap means overheating — output beyond sustainable capacity, tight labour and plant, pushing wages and prices, inflation-acceleration pressure.
Policy leans tighter (hike rates, less stimulus) to cool down. The gap is thus the core gauge of cycle position and policy direction, echoing Okun's Law (unemployment vs natural rate).
FAQ
What is the output gap; positive vs negative?
The output gap measures the difference between actual output and potential output, in %: (actual − potential) ÷ potential × 100%. Potential GDP is the maximum sustainable output at full employment without accelerating inflation; actual GDP is what is produced now. Sign shows the cycle. A negative gap (actual < potential) — recession gap — means output below capacity: idle plant, under-employment, high unemployment, weak inflation or deflation risk. Example actual 9,500, potential 10,000 → −5%, 5% below capacity. A positive gap (actual > potential) — expansion/inflation gap — means the economy 'over-runs': strong demand pushes output beyond sustainable, overtime, labour shortage, usually wage/price pressure and inflation. So the gap is a thermometer of cold/hot/balanced.
How does the gap guide monetary and fiscal policy?
The gap is a core reference for 'accelerate or brake' because it shows slack vs inflation pressure. A negative gap (below capacity, slack, high unemployment) means weak demand needing support: policy leans expansionary — the central bank may cut rates and add liquidity to lower borrowing costs and spur investment/consumption; the government may raise spending or cut taxes, with the fiscal multiplier lifting demand toward potential. With slack, stimulus usually does not instantly spark high inflation. A positive gap (overheating, shortages, rising inflation) leans contractionary — the central bank may hike and tighten to cool demand; the government may cut spending or raise taxes to prevent a wage-price spiral. Near-zero gap means balanced full employment, policy stays neutral. Many central banks (e.g. the Taylor rule) explicitly put the output gap and inflation gap into rate setting. Estimating the gap well matters — a wrong call (e.g. mistaking structural decline for a cyclical gap) can over-stimulate inflation or over-tighten recovery. Pair with the natural-rate calculator.
How is potential GDP estimated; why is the gap hard to measure?
The hard part is the denominator — potential GDP is not directly observable, only modelled. Actual GDP is measured statistically; potential GDP is a theoretical 'capacity' level, estimated indirectly, so the gap carries uncertainty. Methods: (1) production function — supply-side inputs (labour, capital, TFP) at full employment; (2) statistical filter (e.g. HP filter) — separating long-run trend from short cycles, trend ≈ potential; (3) multivariate models with inflation/unemployment. Estimates differ by method and are revised later, so potential GDP is a range, not a precise number. Risk: policymakers decide in real time on estimates that may be off — mistaking a structural capacity drop for a temporary cyclical gap can over-stimulate. So treat the gap as a reference for slack, cross-checked with inflation, unemployment and capacity utilisation.
Relation between the output gap and Okun's Law?
They are two sides of the same state — the gap from output, Okun's Law from unemployment, linked by an empirical coefficient. Okun observed: when actual GDP is below potential (negative gap), the economy under-runs and unemployment exceeds the natural rate; a positive gap means unemployment below natural. Roughly: unemployment gap ≈ −coefficient × output gap, the Okun coefficient about −0.3 to −0.5 across economies — each ~2pp extra negative gap lifts unemployment ~1pp. Example: gap −4%, coefficient −0.5 → unemployment ~2pp above natural. Useful because, since potential GDP is hard to see, policymakers invert it — use the unemployment gap to infer the output gap, cross-checking. It explains why central banks watch both inflation and employment: negative gap (high unemployment) → stimulate; positive (overheating, low unemployment) → tighten. That is why the gap is a core monetary-policy indicator.
Related Tools
References
Content review: Calculatorism Finance Team. Results are for reference only; please refer to the relevant authorities for the official figures.